Guangdong Free Trade Zone

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Hong Kong law firm eyes first-mover advantage

When it comes to the legal environment, Hong Kong is typically viewed as more progressive than mainland China. But according to one prominent Hong Kong lawyer, in some respects, China is forging ahead.

This is especially true in places like the recently unveiled Guangdong Free Trade Zone (GFTZ), which is creating new opportunities for Hong Kong firms, and cross-border cooperation, in the process.

At the end of last year, Lam, Lee & Lai Solicitors became the first Hong Kong law firm to gain approval to set up a joint venture with a mainland partner in Qianhai, a special economic zone that is now part of the GFTZ (along with nearby Hengqin and Nansha).

The impending formation of the zone was part of that decision, says Ambrose Lam, managing partner of Lam, Lee & Lai, although the main factor was the more liberal environment offered by Qianhai, which is serving as a test-bed for reform on several fronts.

Whereas in Hong Kong law firms have to be run “in a very traditional way,” in Qianhai there is more flexibility available in terms of the partnership structure and also more room for multi-disciplinary practices that venture into areas like accountancy and business consultation, says Mr Lam.

That encouraged Lam, Lee & Lai to set up shop in the zone with Shenzhen-based partner China Commercial Law Firm. Their venture, China Commercial Lam Lee Lai, includes lawyers from both sides.

“It took me a long time to find the right partners…with a long-term vision, that’s one of the major factors that I took into account,” Mr Lam says. “After the official launch of the GFTZ I think the opportunity is even greater. Because Hong Kong is actually the country’s first free trade zone, we are more familiar with the rules of the game.”

Open-door policy
While many of the specific rules that will govern the GFTZ have yet to be worked out, the zone is expected to build on the more liberal investment and ownership rules offered to Hong Kong firms under the Mainland and Hong Kong Closer Economic Partnership Arrangement (CEPA). Over time, more service industries are expected to be opened up to Hong Kong firms, such as finance, tourism and logistics.

China Commercial Lam Lee Lai has already seen a spike in inquiries by Hong Kong companies keen on learning more about establishing a presence in the GFTZ. A rush of new business is expected to follow, as cross border exchanges proliferate—for better, and, occasionally, for worse.

“We’ve received a lot of expressions of interest, not only in the financial industry, but in traditional areas of litigation as well. As the economic relationship (between Hong Kong and mainland China) gets closer and closer, there will be more disputes given the kinds of transactions involved,” Mr Lam says.

One of the most intriguing aspects of the GFTZ—for Lam, Lee & Lai and Hong Kong companies more generally—is that those disputes could be heard by what is essentially a hybrid court, where elements of Hong Kong’s renowned legal system are adopted, creating a more level playing field for Hong Kong investors.

The Qianhai District Court is the first in China to allow Hong Kong jurors to hear cases, and is also exploring the application of Hong Kong law to commercial disputes. In future the plan is for all commercial cases involving a Hong Kong party or element to be sent to the Qianhai court to adjudicate.

The intention is to build confidence among Hong Kong businesses and contribute to the development of China’s own legal system. An institute has also been established to train lawyers from both Hong Kong and the mainland in the intricacies of each other’s jurisdictions.

This should encourage more Hong Kong companies to take advantage of the possibilities offered by the GFTZ. Mr Lam believes the zone will not only serve as a conduit of inbound investment, but also as a channel for Chinese companies looking to expand abroad—a process in which Hong Kong’s generally more internationally experienced firms will be well-placed to serve as partners and advisors.

“The Chinese government is encouraging mainland enterprises to do outbound investment together with the help of Hong Kong entrepreneurs and the Hong Kong service industry, so I see a lot of potential there,” Mr Lam adds. “In the past mainland conglomerates lost a lot of money because they didn’t know the rules of the game in the western world, or much about the common law system. But Hong Kong lawyers certainly do, so we have this advantage as a bridge between the Western world and the mainland culture.”

Managing expectations
Having been actively involved in the legal reforms taking place in the zone as a senior member of the Hong Kong Law Society, Mr Lam says he is “very happy” with the way things have progressed so far. But there is also no denying the amount of work left to do.

China’s legal system, from its limited use of the jury system to the lack of focus on precedent, remains fundamentally incompatible with many aspects of Hong Kong’s, and it is not yet clear just how far the application of Hong Kong law will be permitted to progress, both in the GFTZ and beyond.

While integrating legal systems remains a distant prospect, there are also more practical hurdles to overcome. In Qianhai alone, only a handful of the 1,300 registered Hong Kong companies have been able to find office space. A burst of construction is underway, although the infrastructure crunch is likely to continue for some time.

For now, the GFTZ remains largely a work in progress. The rule book is still being written and the skyline rebuilt. Yet Mr Lam has few doubts about the end result—or his firm’s decision to set up stakes in the GFTZ’s most formative period.

“Definitely there are still a lot of things to work out; as with any new policy in China you can’t have everything set up in detail right away,” says Mr Lam. “(Former Chinese leader) Deng Xiaoping had a saying about that: you have to cross a river by feeling the stones.”

The information, findings, projections, representations, opinions or comments in this article (the "Content") are those of The Economist Group and they do not constitute any form of opinion, advice, recommendation, representation or endorsement of The Hongkong and Shanghai Banking Corporation Limited (the "Bank"). The Bank makes no representation or warranty (express or implied) of any nature and accepts no liability or responsibility with respect to the Content and any inaccuracy or omission in it.

James is Bureau Chief for Monocle, Hong Kong. Prior to this he worked as a Senior Editor with The EIU's Thought Leadership team for over three years researching business, technology and cities. He has also written about business and technology for The World In 2015 and economist.com. James has previous experience from IR magazine, a finance publication, where he was research editor in London and Shanghai. Additionally he contributed to Legal Week, a weekly legal magazine, and worked on the FT Innovative Lawyers Awards in the US and Europe. James is an English law-qualified solicitor (currently non-practising) and holds post-graduate legal qualifications from BPP Law School and an LLP in Law from the London School of Economics.

EIU (Economist Intelligence Unit) Perspectives is a part of the Economist Group.

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